Arab Academy for Science, Technology

& Maritime Transport

Advanced Management Institute (AMI)

Comprehensive Exam

Spring 2003

Wall-Mart Stores

Case Study

Presented by

Najlaa Ahmed Kallousa

June 2003

0
 Wal-Mart Stores

Background

Sam Walton started his retail career in 1940 as a management trainee with
J.C.Penney Co. in Des Moines, Iowa. He was impressed with the Penney
method of doing business and later modeled the Wal-Mart chain on "The
Penney Idea". The Penney Company found strength in calling employees
"associates" rather than clerks.

Following service in the U.S Army during the Second World War, Sam
Walton acquired a Ben Franklin variety store franchise in Newport, Arkansas.
He operated this store successfully with his brother, James L. "Bud" Walton
(1921-1995), until losing the lease in 1950. When Wal-Mart was incorporated
in 1962, the firm was operating a chain of 15 stores. Bud Walton become a
Senior Vice President of the firm and concentrated on finding suitable store
locations, acquiring real estate, and directing store construction.

The early retail stores owned by Sam Walton in Newport and Bentonville,
Arkansas, and later in other small towns in adjoining southern states, were
variety store operations. They were relatively small operations of 6,000
square feet, were located on "main streets" and displayed merchandise on
plain wooden tables and counters. Operated under the Ben Franklin name
and supplied by Butler Brothers of Chicago and St. Louis, they were
characterized a limited price line, low gross margins, high merchandize
turnover, and concentration on return on investment. The firm, operating
under the Walton 5 & 10 name, was the largest Ben Franklin franchisee in the
country in 1962. The variety stores were phased out by 1976 to allow the
company to concentrate on the growth of Wal-Mart discount department
stores.

At the beginning of 1991, the firm had 1,573 Wall-Mart Stores in 35 states
with expansion planned for adjacent states. In 2000, Wal-Mart Stores
operated mass merchandising retail stores under a variety of names and retail
formats including: Wal-Mart discount department stores, SAM's Wholesale
Clubs, wholesale/retail membership warehouses, and Wal-Mart Super
centers, large combination grocery and general merchandise stores in all 50
states. In the International Division, it operated stores in Canada, Mexico,
Argentina, Brazil, Germany, South Korea, United Kingdom, and Puerto Rico,
and stores through Joint ventures in China. It was not only the nation's largest
discount department store chain, but it had also surpassed the retail division
of Sears, Roebuck, and Co. in sales volume as the largest retail firm in the
United States, and it was also considered the largest retailer in the world.

1. Current Situation

 Current Performance

1
The company recorded an improvement in all of profitability and return on
investment and it witnessed a rapid increase in sales consequently in market
share.

 Strategic Posture

1. Mission

There is no agreed stated mission statement for the chain. In some stores
they raise logos such as "everyday low prices" and in other ones they raise
"provide the customer with a clean, pleasant, and friendly shopping
experience". This can be kind of weaknesses for the firm. The absence of
agreed mission statement provide unclear picture for employees and
customers to know the firm current situation.

2. Objectives

The corporate and marketing strategies that emerged at Wal-Mart were based
upon a set of 2 main objectives that had guided the firm through its growth
years

In the first objective, the customer was featured "customer would be

provided what they want, when they want it, all at a value".

In the second objective, the team spirit was emphasized "treating each
other as we would hope to be treated, acknowledging our total dependency
on our Associate-partners to sustain our success".

The approach included: aggressive plans for new store openings, expansion
to additional states, upgrading, relocation, refurbishing and remodeling of
existing stores, and opening new distribution centers.

3. Strategies

The company followed a variety of strategies as follow:

1. Growth strategy where the firm developed an aggressive expansion

strategy. New stores were located primarily in communities of 5,000 to
25,000 in population. The store size ranged from 30,000 to 60,000
square feet with 45,000 being the average. The firm also expanded by
locating stores in contiguous geographic areas. When its discount
operations came to dominate a market area, it moved to an adjoining
area. While other retailers built warehouses to serve existing outlets,
Wal-Mart built the distribution center first and then spotted stores all
around it. And the acquisition of McLane Company, Inc., in 1991.
2. Horizontal growth, since the firm expanded its business in 50 states
and invaded around 9 foreign countries.
3. Cooperative Strategy, where the company launched several programs
such as the "Buy American" Program was a Wal-Mart retail programs

2
 initiated in 1985, which resulted in cooperation with Gitano Group, Inc.
for fashion.
4. Cost leadership strategy, the firm aimed to offer low price products and
it raised a logo of "everyday low prices"
5. Differentiated strategy, the firm aimed to offer as many products as it
can for various uses.

4. Policies

There are no stated policies, but it can be implicitly understood that the
company implement the Total Quality Management. That the company applied
the three common TQM principles:

1. Customer Focus.
2. Continuous Improvement.
3. Employees Empowerment.

2. Corporate Governance
 Board of Directors

Exhibit 2 in the paper mentioned 15 members of Wal-Mart's Board of

Directors.

 Top Management

Exhibit 2 mentioned a list of a number of officers.

3. External Environment: Opportunities and Threats (SWOT)

 Societal Environment

1. Political - Legal Factors

The rapid spread of programs that encouraging of the American products.

2. Economic Factors

By 1998 the country had return to prosperity, and witnessed an

improvement in the economic indicators. Unemployment was low, total
income was relatively high, and interest rates were stable, Combined with
a low inflation rate. At the beginning of the year 2000, the United States
had experienced 1 of the longest period of economic expansion in its
history.

3. Sociocultural Factors

The American society has witnessed a big increase in the buying power
and consumers were generally willing to buy

3
 4. Technological Factors

The United States is considered to be number 1 in the world in the

technological development. So the firm has a great opportunity to benefit
from it.

 Task Environment (Industry)

Porter’s Approach

Michael Porter contends that a corporation is most concerned with the

intensity of competition within its industry. The level of this intensity is
determined by basic competitive forces. “The collective strength of these
forces,” he contends, “determines the ultimate profit potential in the industry,
where profit potential is measured in terms of long-run return on invested
capital.” In carefully scanning its industry, the corporation must assess the
importance to its success of each of the 6 forces: threat of new entrants,
rivalry among existing firms, threat of substitute products or services,
bargaining power of buyers, bargaining power of suppliers, and relative power
of other stakeholders.
Potential Entrants

Threat of
Relative power New
of Unions, Entrance
Governments, Industry
Other .etc Competitors
Stakeholders

Buyers
Bargaining
Suppliers Rivalry among power of
existing Firms Buyers
Bargaining
power of
Suppliers
Threat of
substitute
product or
service

Substitutes

Threat of New Entrants

4
The potential of new entrants in this industry is low for many reasons, yet the
number of the existing retailers is considered to be low or medium, however
most of the existing firms have well brand name. In which make it's rather
difficult to enter this era and it stipulates high capital requirements to be able
to compete the existing firms. The market is relatively saturated. And the firm
is considered to be the market leader.

Rivalry among Existing Firms

The rivalry is considered to be medium in this industry for many reasons:

Several formerly successful firms had declared bankruptcy, and as a result

either liquidated or reorganized, which reduce the degree of the competition.
There is still a place for the remaining companies to offer promotions or
differentiated services.

Threat of Substitute Products or Services

The threat of substitute is considered to be low. That in the worst case the
people can't give up the essentials products.

Bargaining Power of Buyers

The bargaining power of buyers is considered to be at its high level, that the
retailing industry is highly affected by changing the economic indicators and
increased competitive pressures.

Bargaining Power of Suppliers

Yet the case didn't mention anything about the suppliers, the bargaining
power of suppliers in this industry based on the number of suppliers and oh
the nature of the relationship between them and the company. But I don't think
there is a supplier refuses to deal with the market leader. So the bargaining
power is considered to be low.

Relative Power of Other Stakeholders

The threat of other stakeholders is low to medium, government regulations,

and the increasing role of human rights organizations and health care
associations.

External Factor Analysis Summary EFAS

Weighted
External Factors Weight Rating Comments
Score
Threats
Dollar exchange rate 0.1 4 0.4 Concerning the international markets
GATT 0.25 5 1.25 The risk of importing far east products

Opportunities
Economic Indicators 0.35 4 1.4 Benefits from the economic prosperity

5
Encouraging the
domestic products 0.25 5 1.25 Benefits from low cost
Government
regulations 0.05 2 0.1 To adapt efficiently
Total Scores 1 4.4 Above Average
4. Internal Environment: Strength and Weaknesses (SWOT)
 Corporate Structure

There is no information mentioned on the type of the corporate structure,

but it implicitly appeared that the firm's structure is flat or cross-function
structure other than traditional hierarchical structure. But the firm provide
more authority for its employees and it called them associates and
empower them to participate along the process.

 Corporate Culture

The company enjoys a beautiful culture within the company, where the firm
puts emphasis on human resources management. And the company gives
its employees deep authority and as we mentioned above called them
associates instead of clerks. And it uses us instead of me pronoun.

 Corporate Resources
1. Marketing

The firm adopted "The Penney Idea" who developed many techniques to
achieve customer satisfaction. The firm has launched its discount
department store chain, the store designed to offer 1 stop shopping in 36
departments that included family apparent, health and beauty aids,
households needs, electronics, toys, fabric and crafts, automotive
supplies, lawn and patio, jewelry, and shoes. In addition at certain store
locations, a pharmacy, automotive supply and service center, garden
center, or snack bar were also operated (diversifications). The firm also
operates its stores with "everyday low prices". In addition it offers
excellent services for the customers through warm greetings and with its
fantastic design and unified outlets design.

The firm offers a "satisfaction guaranteed" refund and exchange policy to

attract customers to be confident of Wal-Mart's merchandise and quality.

In other words the firm has developed an excellent marketing mix.

2. Finance

The objective of the company is to increase its sales and consequently

its profit. As a result of aggressive expansion plan the firm followed, the
fixed assets has sharply increased from 1999 to 2000.

Yet the sales increase with an average of 20.8% within the last decade
the financial ratios has recorded deterioration. The current ratio declined

6
from 1.7 in 1990 to reach 1.5 in 1995 and fall sharply to reach 0.9 in
2000, which means there is a big problem in the liquidity.

Return on assets recorded deterioration from 1990 to 1997 to improve

after that period. But it considered a bad ratio.

Also the ROE has witnessed deterioration in the beginning of the decade
and then it begun to improve.

The firm recorded a sharp increase in long term debt which led to
increase the financial risk.

Finally as a result of the aggressive expansion the financial ratios

witnessed deterioration. So I recommended following one of the stability
strategy.

3. Research and Development

There is nothing mentioned regarding this department, yet it's implicitly

understood that the firm spend a lot on developing new techniques and
services and it has strong team specialized in developing the position of
the firm in the market.

4. Operations and Logistics

The firm built the distribution center first and then spotted stores all
around it, as opposed to the rest of retailers who built warehouses to
serve the existing outlets. In Wal-Mart, most stores were less than a 6-
hours drive from 1 of the company's warehouses. The first major
distribution center, 390,000 square-foot facility opened in Searcy,
Arkansas, outside Bentonville in 1978.

5. Human Resources

The firm puts more emphasize on human resource management,

employees of Wal-Mart became "associates," a name borrowed from
Sam Walton's early association with J.C.Penney Co. input was
encourage at meetings at the store and corporate level. The firm hired
employees locally, provided trainings programs, and through a "Letter to
the President" program, management encouraged employees to ask
questions, and made words like "we", "us" and "our" a part of the
corporate language. A number of special award programs recognize
individual, department, and division achievement. Stock ownership and
profit-sharing programs were introduced as part of a "partnership
concept".

Briefly the company has applied the recent philosophies and techniques
in managing its human resources.

6. Information Systems

7
 Technological advancements such as scanner cash registers, handheld
computers for ordering of merchandise, and computer linkage of stores
with the general office and distribution centers improved communications
and merchandise replenishment. Each store was encouraged to initiate
programs that would make it an integral part of the community in which it
operates.

It seems that the company has strong information system.

External Factor Analysis Summary EFAS

Weighted
External Factors Weight Rating Comments
Score
Weaknesses
No clear mission statement 0.1 4 0.4 Urgent for employees and customers
Lack of international orientations 0.05 2 0.1 Loss international opportunities
Financial performance 0.15 4 0.6 May lead to great losses

Strengths
Strong distribution channels 0.2 4 0.8 Competitive advantage
Products diversification 0.2 4 0.8 More attractive
Information system 0.1 4 0.4 Strong communications
Strong brand name 0.1 4 0.4 Loyalty
Human resource management 0.1 5 0.5 Successful services
Total Scores 1 4 Above Average
5. Analysis of Strategic Factors (SWOT)
 Situation Analysis

From the EFAS and IFAS the company is considered well-positioned

(pioneer) in the market. But the company is suffering from some financial
problems so the company has to deal with it.

The company has competitive advantage in all of distribution channels,

products diversification, and strong HR management.

 Review of Mission and Objectives

As mentioned before the company managed to achieve its stated

objectives.

6. Strategic Alternative and Recommended Strategy

 Strategic Alternative

I think the company managed its strategies effectively and efficiently. It

used a mix of various strategies. But I think the company has to follow one
of the stability or retrenchment strategies during the coming period. That
the growth or the expanding strategies it follows has bleed its financial
resources.

 Recommended Strategy

8
 As above mentioned the company has to implement one of the stability or
retrenchment strategies during the coming periods to stop bleeding its
resources.

7. Implementation

As mentioned before the company has implemented several principles of total

quality management philosophy, such as:

1. Management commitment: creating committed management to the

process of continuous improvement, a dedication to empowering people
to change, and to periodically raise the goals for improvement. Adoption
and communication of TQM: using tools like mission statement and
slogans.
2. Employee empowerment: giving workers the responsibility for
improvements and the authority to make changes to accomplish them.
3. Reward System: is the missing link that motivates managers and
employees to "walk the talk" and use TQM to the fullest and it's divided
into two groups, monetary and non-monetary rewards.
4. Integrating training: includes different aspects of TQM elements,
team skills and problem-solving techniques.
5. Process improvement: process of reducing waste and cycle times in
all areas through cross-departmental process analysis.
6. Quality at source: the philosophy of making each worker
responsible for the quality of his/her work.
8. Evaluation and Control

I think the company outperformed the market during the last decade so it
deserves to be called the market leader or the largest retailer in the world. But
I think the company should take care during the coming period that any
recession in the American economy might lead to great losses that it
increased its debt in a way that led to increase its financial risk. In addition,
retailing industry is more sensitive to any change in the economic indicators,
so the firm should follow one of the stability strategies or retrench one of its
activity.